2015 (6) TMI 1176 - AT - Income Tax

Disallowance of rebate u/s 80IC as per Rule 8D read with section 14A - Held that - It is relevant to observe that in the case of Godrej & Boyce Mfg. Co. Ltd. Vs. DCIT 2010 (8) TMI 77 - BOMBAY HIGH COURT has held that Rule 8D is applicable from assessment year 2008-09. It has no application prior to assessment year 2008-09. In the instant case, the assessment year is 2007 08. It is pertinent to state here that following the decision of the Hon ble Bombay High Court in the case of Godrej & Boyce Mfg. Co. Ltd. (supra) different Benches have set aside the matters back to the Assessing Officer where the additions were made on the basis of Rule 8D. In view it Rule 8D is not applicable to the assessment year under consideration and, therefore, set aside the orders of the lower authorities on this issue and remand the matter to the file of the Assessing Officer to decide the issue afresh Disallowance of rebate u/s 80IC on account of Exchange Rate Fluctuations - Held that - The issue in hand is squarely covered in favour of the assessee and against the Revenue by the decision of the Hon ble Bombay High Court in the case of CIT Vs. Rachna Udyog 2010 (1) TMI 38 - BOMBAY HIGH COURT has categorically held that the exchange rate fluctuation arises out of and is directly related to the sale transaction involving the export of goods of the industrial undertaking and, therefore, difference on account of exchange rate fluctuation is entitled to deduction under section 80IB of the Act. No contrary decision was brought to my notice. Respectfully following above thus hold that the difference on account of exchange rate fluctuation is entitled to deduction under section 80IC of the Act. This ground of appeal is allowed. Disallowance on account of interest expense under section 36(1)(iii) - Held that - As assessee submitted that the provisions of section 36(1)(iii) of the Act are applicable in this case. However, she stated that the disallowance of interest @ 12% is not correct and the same should be worked out on pro-rata basis. Fully agree with the above submissions of the learned A.R. for the assessee and direct the Assessing Officer to re-work the disallowance on pro-rata basis. This ground of appeal is disposed off accordingly. Disallowing deductions u/s 80IC for the additions made due to certain disallowances - Held that - Direct the AO to re-compute the deduction allowable under section 80IC of the Act keeping in view the above observations and in accordance with law after affording reasonable opportunity of being heard to the assessee.

Summary

Issues:
1. Disallowance of rebate u/s 80IC
2. Disallowance of rebate u/s 80IC on account of Exchange Rate Fluctuations
3. Disallowance of interest expense under section 36(1)(iii)
4. Disallowance of total interest expenses claimed during the year u/s 14A and 36(1)(iii)
5. Not allowing deductions u/s 80IC for certain disallowances

Issue 1: Disallowance of rebate u/s 80IC
The appeal challenged the disallowance of rebate u/s 80IC amounting to Rs. 5,50,866 under Rule 8D read with section 14A. The CIT (Appeals) had deleted a portion of the disallowance, but the Assessing Officer added back the balance amount. The ITAT Chandigarh noted that Rule 8D was not applicable for the assessment year 2007-08 based on a decision by the Bombay High Court. Consequently, the ITAT set aside the lower authorities' orders and remanded the matter to the Assessing Officer for fresh consideration.

Issue 2: Disallowance of rebate u/s 80IC on account of Exchange Rate Fluctuations
The dispute involved the disallowance of rebate u/s 80IC amounting to Rs. 8,22,196 due to Exchange Rate Fluctuations. The Assessing Officer had not allowed the deduction under section 80IC, which led to the addition of the amount to the taxable income. The ITAT referred to a judgment by the Bombay High Court that supported the allowance of deductions for exchange rate fluctuations related to export transactions. Following the High Court's decision, the ITAT allowed the ground of appeal, stating that the difference on account of exchange rate fluctuation was entitled to deduction under section 80IC.

Issue 3: Disallowance of interest expense under section 36(1)(iii)
The Assessing Officer disallowed interest expenses at a rate of 12% on advances made for asset purchase, adding the amount to the assessee's income. The CIT (Appeals) upheld this disallowance. However, during the appeal, the ITAT agreed with the assessee's argument that the disallowance should be on a pro-rata basis rather than a flat 12% rate. Consequently, the ITAT directed the Assessing Officer to re-calculate the disallowance accordingly.

Issue 4: Disallowance of total interest expenses claimed during the year u/s 14A and 36(1)(iii)
The appeal contested the disallowance of total interest expenses claimed during the year amounting to Rs. 12,84,121 under sections 14A and 36(1)(iii). However, during the hearing, the counsel for the assessee did not press for this ground of appeal, leading to its dismissal as not pressed.

Issue 5: Not allowing deductions u/s 80IC for certain disallowances
The ITAT directed the Assessing Officer to re-compute the deduction allowable under section 80IC considering specific observations and in accordance with the law after providing a reasonable opportunity for the assessee to be heard. As a result, the appeal was allowed partly, and partly for statistical purposes.

This detailed analysis of the judgment from the Appellate Tribunal ITAT Chandigarh covers all the issues involved, providing a comprehensive understanding of the legal reasoning and outcomes for each matter raised in the appeal.